Targeting Disclosure of Annuity Charges
Melinda Cotton got a nasty surprise this year when she read the annual statement for a variable annuity she’d bought in 1977: Half of the annual dividends she’d earned on her account in 2004 had been sucked away by so-called actuarial risk charges.
What galled her most was that those charges had never before shown up on an annual statement, even though the insurance company, she said, promised to disclose how much she was paying in fees. As a result, she’d held onto the annuity for 27 years without knowing how much the policy’s costs were eating into her returns.
It made her mad enough to sue the company.
“By hiding the sums they were deducting, I was deprived of the opportunity to do the sane thing and transfer my money,” said Cotton, a Long Beach resident. “I’m sure a lot of other annuity owners are in the same boat.”
Indeed they may be, as evidenced by the number of complaints fielded by insurance regulators.
“We are getting more complaints on this,” said California Insurance Commissioner John Garamendi. “We have also made a major effort to tighten up the regulations -- increase disclosures and improve the product for consumers. We have revamped our entire annuity program.”
Other insurance regulators and state attorneys general are also focused on the topic -- recommending new rules, legislation and, sometimes, prosecution.
Largely as a result of legal and regulatory demands, insurers are increasingly spelling out fees that were not previously disclosed, said Robert Hunter, director of insurance for the Consumer Federation of America. When the fees prove substantial, an increasing number of consumers, like Cotton, are vowing to do something about it.
Cotton got her annuity as part of a supplemental benefit plan when she worked for a community college in the late 1970s. She left that job long ago and is retired, but she maintained the account.
She still has all of the documentation from the original sale, including a brochure titled “What Your Confirmation Means.” That brochure spelled out how she could read her annual statements and just where the actuarial risk fee was supposed to be reported -- but wasn’t. (The actuarial risk fee is designed to compensate the insurance company for promising to pay Cotton’s heirs at least as much as the cumulative total of premiums paid, even if the stock market crashed right before she died.)
She also has a contract that says an actuarial risk fee of 0.015% of the average net assets in “the separate account” would be levied each week. But because she didn’t understand what was meant by the separate account and because the fee never showed up on her statements, Cotton assumed it wasn’t assessed.
That changed when she got her 2004 annual statement, showing a $1,171.77 charge -- an amount equal to 3% of her account value. She contacted regulators because, she said, she couldn’t get the insurer, Security Benefit Life of Topeka, Kan., to tell her how much she’d paid in actuarial risk fees in years past, despite repeated requests.
The company responded to the insurance department with a detailed letter, spelling out just how much had come out of Cotton’s account and when.
When Cotton got a copy of the response, she demanded her money back. When the company refused, she filed an action in Small Claims Court in Long Beach. The case is set for hearing on Dec. 13.
The amount at issue: $4,173.18 -- the total amount deducted from her investment earnings over the course of 27 years. Although she acknowledges that it seems like a small amount, the fees add up to more than what she had contributed to the account -- $3,473.28. (The account is now worth a little more than $38,000.)
Security Benefit Life maintains that Cotton’s main complaint -- that the fees weren’t disclosed -- is just not true. “The fees were disclosed, just not in the way Ms. Cotton would have preferred,” said Michel Cole, a spokeswoman for Security Benefit.
Each statement disclosed the net amount of money earned on the account, Cole said. The company deducted the fees from the return, so although there was no line item on the statement showing how much the fees ate into the return, the net return reflected it. “We disclose what is required by law in the prospectus and in the contract,” Cole said.
Such disclosures are no disclosure at all, countered Hunter of the consumer federation. “That’s disclosure by indirection. It doesn’t work as a real disclosure,” he said. “Disclosure should show the details, so you know how much you earned and how much was taken out by the company.”
Security Benefit’s annuity statements were revamped in 2003, Cole said, to make them easier to read. The reason Cotton didn’t see the actuarial risk fee on the 2003 statement was because it wasn’t deducted. It’s levied out of account earnings, and the account didn’t earn enough between 2000 and 2004 to absorb the fees, she explained.
The fees, as reported by Security Benefit to the California Department of Insurance, generally were levied five or six times per year, but the amount varied greatly. In March of 1986, for instance, a fee of $7.08 was subtracted from a $54.83 dividend; a month later, the fee was $17.46 on a dividend of $77.60. In December of 1987, the fee was just $7.33 and deducted from $279.47 in dividends.
The company told the Department of Insurance that there was a method to the apparent madness. The fee amounts to 0.7955% of the account value on an annual basis, but it’s deducted only when the company pays dividends or when the policyholder makes a transaction in the account.
Unpaid fees accumulate until these events happen. Consequently, the amount Cotton paid in 2004 appears to be considerably more than the contracted fee, but that amount included deferred payments for four years’ worth of charges.
Cotton considers the costs excessive, but she’s not debating the size of the fee -- she’s fighting over disclosure, she said.
Her contention is simple: The company promised to disclose the fee on her statements and it didn’t. She wants all 27 years’ worth of undisclosed deductions refunded to her -- and not a penny less. She said Security Benefit already offered to refund $2,100, but she’s not inclined to settle.
“I think it’s only because of the noise being made by the various attorneys general offices and from people like me that they actually pay attention,” she said. “Maybe taking this to Small Claims Court will set an example so that other people will do the same and force these companies to change their practices.”
Kathy M. Kristof, author of “Investing 101” and “Taming the Tuition Tiger,” welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof @latimes.com. For previous columns, visit latimes.com/kristof.
